DECA+ Business Management and Administration Practice Exam

Which practice may indicate a potential conflict of interest within financial trading?

1. Skimming

2. Picketing

3. Churning

4. Bundling

The correct answer is: Churning

Churning refers to the excessive buying and selling of securities in a customer's account primarily to generate commissions for the broker rather than to benefit the customer. This practice can indicate a conflict of interest because the broker's actions may prioritize their own financial gain over the best interests of the client. When brokers engage in churning, they may be tempted to create activity in a client's account that is unnecessary or inappropriate based on the client's actual investment goals or risk profile, leading to increased costs for the clients and potentially harm to their investment strategy. This conflict arises from the misalignment of the broker's incentives—earning more commissions through frequent trades—versus the client's objective, which is usually to achieve long-term growth or stability with their investments. Recognizing churning as a potential conflict of interest is crucial, as it highlights the need for transparency and ethical conduct in financial trading to protect investors' interests.